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Wall Street still ignoring the fiscal cliff

June 28, 2012: 11:56 AM ET

Most economists aren't factoring the doomsday scenario into their forecasts.

Fortune -- Here we go again. Wall Street has a history of not focusing on bad news until it's too late. Then panic ensues. We might be seeing that pattern again with the so-called fiscal cliff.

A recent survey found that 93% of top Wall Street strategists and economists still aren't factoring into their estimates for next year the epic mix of tax increases and spending cuts that are expected to kick in January 1. The question is whether Wall Street is correctly handicapping the fiscal cliff, or just being ignorant.

"It's clear that a large percentage of Wall Street doesn't expect us to go over the fiscal cliff," says Randell Moore, who is the editor of the Blue Chip Economic Indicators, which runs the highly regarded monthly survey of Wall Street strategists. "That may be optimistic, but that's their forecast."

MORE: Bernanke fiddles while Obama burns

Indeed, there is good reason to believe we will avoid the worst. Yesterday, FORTUNE reported that the White House is already floating a plan that would delay some of the spending cuts for six months. The tax increases for individuals making less than $250,000 could be put off for another year. And recent history suggests that some kind of last minute deal will be struck in Washington.

But if the fiscal cliff does happen, it appears it will be a surprise to Wall Street. Last week, I wrote a story on how Ethan Harris, the top U.S. strategist at Bank of America, thinks the fiscal cliff, because of uncertainty, could start to be a drag on the economy as soon as later this year. Most economists, he said, are wrongly assuming the fiscal cliff won't impact the economy until next year. But even that doesn't appear to be the case.

The vast majority of the 52 economists polled by Blue Chip newsletter said that their estimates assume that some or all of the Bush-era tax cuts would be extended. Blue Chip's editor Moore didn't ask about spending cuts. But tax increases will account for 80% of the impact of the fiscal cliff next year.

MORE: The fiscal cliff may look more like a slope

In all, Wall Street strategists, according to the Blue Chip survey, believe the U.S. economy, before inflation, will grow 2.3% in the first half of 2013. Last month, the Congressional Budget Office said that if the fiscal cliff happens, it's likely that the economy will fall into recession, with GDP declining 1.3% in the first half of the year.

Even that, though, might be optimistic. The CBO believes the fiscal cliff will cause the economy to slow by 6.6 percentage points in the first half of next year. That means the CBO is predicting that without the fiscal cliff the economy is likely to grow 5.3% in the first half of the year. That would be a huge jump from the first quarter of 2012, when the economy expanded 1.9%. Even the most exuberant economist in Blue Chip's survey thinks growth will top out at 3.4% next year.

Assume Wall Street's consensus is accurate, and we could be looking at a recession in the first half of next year in which the GDP drops -4.3%, which would be worse than two of the last three recessions, though not as bad as the most recent. Bottom line: If we do go over the fiscal cliff, Wall Street's expectations have a long way to fall. The market may too.

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About This Author
Stephen Gandel
Stephen Gandel

Stephen Gandel has covered Wall Street and investing for over 15 years. He joins Fortune from sister publication TIME, where he was a senior business writer and lead blogger for The Curious Capitalist. He has also held positions at Money and Crain's New York Business. Stephen is a four-time winner of the Henry R. Luce Award. His work has also been recognized by the National Association of Real Estate Editors, the New York State Society of CPA and the Association of Area Business Publications. He is a graduate of Washington University, and lives in Brooklyn with his wife and two children.

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